Disclose method & fees, credit rating agencies told

Disclose method & fees, credit rating agencies told

The disclosure guidelines, issued by Sebi against the backdrop of the recent global financial meltdown, require CRAs to frame policies and a code of conduct to deal with the issues related to conflict of interest between their analysts and entities being rated.

Sebi said the CRAs will have to ensure full compliance with the guidelines by June 30 and make mandatory disclosures twice annually. The role of the rating agencies was questioned during the global financial meltdown as many of the companies and their issues collapsed despite enjoying high ratings.

Maintain records

As per the Sebi guidelines, CRAs will have to maintain records of the important factors underlying the credit rating and a summary of discussions with all the stakeholders involved as well as decisions of the rating committee, including voting details and notes of dissent.

“These records should be maintained till five years after maturity of instruments and be made available to auditors and regulatory bodies when sought by them,” Sebi said in a circular, adding the CRAs will also have to publish information about the historical default rates.

The four major credit rating agencies that operate in the country are Crisil, Fitch, Icra and Care. These agencies, based on the creditworthiness of companies, assign them ratings (like AAA, AA, BBB and so on) which are used by investors, banks and other institutions.

Holding patterns

The new Sebi guidelines require the credit rating agencies to disclose their shareholding patterns as well.

Sebi said, “a CRA shall disclose its shareholding pattern as prescribed by the stock exchanges for a listed company under clause 35 of the listing agreement.”

The market regulator has also made it mandatory for CRAs to publish historical default rates of their various rating categories, saying such default studies are central to the performance of the rating agencies.Sebi said CRAs will also have to annually provide the list of defaults separately for each rating category (AAA, AA, A, BBB, BB, B, C).  The market regulator has specified certain formats for providing details of the credit rating history and defaults of the companies being rated.

Every six months, the agencies will have to provide information like all credit ratings movements, new credit ratings assigned and change of each credit rating from investment grade to non-investment grade and vice versa.

As for dealing with issues of conflict of interest, the regulator said CRAs will have to ensure that their analysts do not participate in any kind of marketing and business development activities, “including negotiations of fees with the issuer whose securities are being rates”.

Crisil welcomes move

Meanwhile, Crisil has welcomed the strengthening of the regulations, and believes that increased transparency is desirable for the industry since it will enhance the comfort investors have with ratings. Managing Director & CEO Roopa Kudva said: “We support the objectives of increasing transparency and accountability of CRAs.

We view the guidelines issued by Sebi as furthering these objectives through a uniform level of disclosures across CRAs.  Crisil is already compliant with all the suggested guidelines for manaing conflicts of interest, and most of the increased disclosure requirements, such as disclosure of shareholding and ownership pattern, our criteria and methodologies, and a bi-annual disclosure of rating changes and defaults in our portfolio.”